iRobot (NASDAQ: IRBT), a leader in consumer robotics, has just acquired its largest European distributor, Robopolis. The acquisition, announced in July, closed on Oct. 2 and comes on the heels of iRobot acquiring its Japanese distributor, Sales on Demand Corporation, just six months earlier. Let's dive into the details of these two acquisitions and check out the implications for the company going forward.
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Taking control in Japan
According to iRobot CFO Alison Dean, a unique chain of events set the stage for iRobot's acquisition of Sales on Demand. First, the owner of the company died, which led to the CFO taking over as CEO. At the same time, Japan was experiencing currency fluctuations that challenged the company, and the business started to stall. iRobot wanted to exert more influence over some of the marketing efforts in Japan, and was not very successful in its efforts. In fact, the distributor wanted to cut back on marketing efforts. Eventually, the distributor decided to sell the business, and iRobot was able to acquire the company for approximately $18 million, essentially the net book value of the assets.
Robopolis: The timing was right
A totally different set of circumstances set the stage for the deal with Robopolis. Robopolis started out as a French distributor at a time when iRobot basically utilized one distributor in each country. Robopolis then went on an acquisition spree, first buying the German and Spanish distributors and eventually growing to the point where it controlled the distribution in seven key markets in Western Europe. While things were going reasonably well in Western Europe, iRobot felt that taking direct control would allow it to better take advantage of the marketing opportunities in the region. The timing was right for the acquisition. In July, the company announced it would be acquiring Robopolis for $141 million in cash.
All the right moves...
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It is hard not to like these two acquisitions. The purchase of Sales on Demand was basically a "fire sale" whereby iRobot got the company for the price of its own inventory and got the underlying business for free. Bears can point to the revenue decline in Japan during the first half of this year, but that was merely the result of the company intentionally reducing channel inventory. Dean stated that the acquisition would have a positive effect on revenue as early as Q3 of this year.
Management also liked the price of the Robopolis deal, but the biggest factor in making the acquisition was the tremendous growth opportunity in the region. By taking direct control of sales and marketing, the company plans to provide a more consistent and effective global message. Dean said she expects the acquisition to improve both the top and bottom lines as early as 2018.
...at the right time
iRobot has always known that it might someday want to take control of its own international distribution channels. However, mastering the nuances of retailer and consumer preferences within a region takes time. It also takes resources. Dean noted that when iRobot's home robots debuted on the international stage, the company simply didn't have the resources to handle its own global distribution.
Now, with $260 million in cash, no debt, and over a decade of experience in both the Japanese and Western European markets, iRobot is ready to reap the benefits of directly controlling its own distribution channels. Cutting out the middleman should provide an incremental boost to margins. Furthermore, it provides the ability to optimize inventory levels and allocate sales and marketing resources at a level that will maximize growth potential. Management is clear that it expects to accelerate growth rates in both regions.
The Roboplois acquisition has just closed, so investors will have to wait to see if iRobot will be able to accelerate EMEA growth above the current mid-teens growth rate. The Sales on Demand acquisition looks like a success already, with YOY growth in Japan accelerating from low single digits prior to the acquisition to an anticipated 20% to 25% growth rate this year.
Investors should keep a close eye on future margins as well as revenue growth in both regions. Since margins are more easily affected by outside factors such as competition, revenue growth is the more relevant of the two. Early indications are positive. Given iRobot's healthy balance sheet, strong growth opportunities, and operations in well over 50 countries, I personally would expect more opportunistic acquisitions in the years to come.
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